Red Tape Repressing SA Tourism

Published on 12th December 2006

The regulatory burden for tourism firms in South Africa is onerous compared to firms in the broader economy. Average regulation compliance costs for tourism firms are up to thirty percent higher than firms in other economic sectors in South Africa. Specific concerns with regulatory costs include the efficiency costs of labour and tax laws. Tourism firms also express real frustration in respect of municipal requirements and interactions, for example rezoning property appears to be time-consuming and costly.

The compliance costs of tax regulations are notably high. SBP’s 2004/05 survey of firms across the economy found that tax regulations were perceived as by far the most onerous set of regulations. However, while the average recurring tax compliance cost for firms in the general survey in 2004/5 was a little off R27 000, the current one is R97 000 for tourism firms – over three times as high.

The once off costs of compliance requirements include, initial registrations, certifications and licenses. Hotels, stalls and markets and travel agencies all report that over half their total once-off compliance costs are incurred in respect of professional fees for consultants, lawyers etc. This suggests the need to look closely at the complexity of start-up procedures in each of these sub-sectors, in order to understand why external consultants are so heavily used.

Reasons for high cost of regulation in the tourism industry

Why should the tourism sector experience on average 30 percent higher compliance costs than other firms in South Africa? Why is the regulatory burden more onerous for this sector?

The tourism sector is extremely diverse, and many tourism firms provide a diversity of services. Given the breadth and complexity of the sector, it is not surprising to find that it is subject to the authority of a wide range of government departments in addition to the Department for Environmental Affairs and Tourism (DEAT). The need for tourism firms to be aware of and compliant with the wide range of regulations applicable to them, together with the need to interact with a number of government departments and statutory bodies on specific issues, creates a considerable regulatory compliance burden for firms.

The regulatory regimes imposed by the different authorities are not always as coherent and joined up as might be desired. The Road Carrier Permit example provides an example of the duplication involved in some regulations, as well as the time-consuming nature of compliance.

The Road Carrier Permit: Onerous Regulations in the Transport Sub-Sector

Anecdotal evidence collected by SBP shows that transport regulations are a major source of regulatory costs for tourism firms. For small taxi and tour operators the real costs as well as the opportunity costs of complying with the Road Carrier Permit regulation in particular are onerous, and the opportunity cost of standing in queues is particularly high for sole operators. A Road Carrier Permit has to be obtained for any vehicle which transports people for a fare. Each vehicle in a taxi owner or tour operator’s fleet must have a separate permit, which is applied for at the Provincial Department of Transport at a cost of R200. A vehicle inspection certificate must be obtained from a provincial transport department depot (in addition to the Road Worthy Certificate required of taxi and tour operators and obtained from local traffic departments). Each application for a Road Carrier Permit has to be published for comments or objections in the Government Gazette.

While waiting for the road carrier permit to arrive, taxi or tour operators must obtain a temporary permit which is valid for 14 to 30 days. The applicant must provide the Department with the same information supplied in order to apply for a Road Carrier Permit, and must also provide an ‘itinerary letter’ which states who the driver will be picking up in the near future and what routes will be taken. The Road Carrier permit can take over 8 months to arrive, which can take over eight months, operators have to spend about an hour every month waiting in a long queue in order to renew their temporary permits, which equates to lost taxi fare. Three days later, they have to return to the provincial transport office to collect the new permits, which can take up to four hours. After three years the Road Carrier Permit will expire, and the process will have to be started again.

In addition there appear to be high levels of fragmentation within the industry, poor access to information about, and understanding of, regulatory requirements, and inconsistent and uneven enforcement.

The problems imposed by the diverse nature of the sector and by being governed under so many departments and regulations are not features of the South African tourism sector alone. Speaking in October 2005, the EU Minister for Tourism and Culture stated that better regulation of the tourism sector was top on the agenda of the 25 Member States of the EU. Sheer volume is a big part of the problem. For example, a UK Better Regulation Task Force study in 2000 highlighted that the volume of ‘essential’ regulatory guidance for the hotels and restaurants sector alone ran to 1500 pages.

Regulations: Getting the Balance Right

Regulations must not always be viewed with suspicion. They are needed to correct market failures such as the formation of monopolies, externalities and free-rider problems. From a policy perspective, the point is to minimise the costs and maximise the benefits of any regulation. Some costs may be unnecessarily high, as they appear to be in many African countries. In Mozambique for example, it takes 13 regulatory procedures, 113 days, and an amount equivalent to 86 per cent of income per capita to start a business. In Canada, starting a business requires two processes, three days, and one per cent of per capita income. The efficiency costs of business registration are far higher in Nigeria than in France: Nigerian entrepreneurs are therefore more likely to be deterred from formalising their businesses than their French counterparts.

In developed countries, well-established systems are likely to ensure that basic regulatory tasks can be undertaken quickly and simply. However, the ‘higher-level’ rules and regulations associated with a more sophisticated level of develop­ment can create difficulties in other areas. For example, it is likely that a business will face far more regulatory compliance costs associated with food product labelling regulations in Germany than in a developing economy. There will also be more pressure from the German public aimed at ensuring that factories do not damage the environment. In other words, the level of sophistica­tion of an economy will tend to determine the level of sophistication at which red tape becomes a major issue.

A further complication arises in some developing countries where regulatory practice in particular areas is ‘imported’ from another country. Many ex-colonies, for example, are still dealing with the legacy of inappropriate laws introduced by foreign rule. The problem is not just an historical one either. The influence and/or apparent success of other (usually developed) countries in particular policy areas may result in a (usually developing) country attempt­ing to adopt a regulatory framework for its own purposes without spending enough time weighing up its merits and applicability to local circumstances. The result can be unwieldy, overly sophisticated regulations that are extremely difficult to monitor or enforce.

A 2004 World Bank study found that many developing countries could improve their annual growth rates by as much as 1,4 per cent a year if they could improve the regula­tory environment for business to equal that of the average country in the top quartile of regulatory quality (as defined by the Bank). In addition, regulatory review is particularly important in creating an environment conductive to the development of small business. Regulatory costs are regressive in that they place a larger burden on poorer people and smaller firms.

Dealing with efficiency costs of regulations can be difficult, and often involves some major trade offs. Making changes to South Africa’s labour regime provides a good example here. Reducing compliance costs on the other hand can be relatively simple (such as reducing duplication of licenses, converting paper databases into electronic databases and speeding up processing times of licenses for example). Even these small changes can make a big difference.

Getting the regulatory environment right is not the magical answer to the development of entrepreneurs or to generating business growth, but is an important component. Creating a more efficient and less onerous regulatory environment can reduce barriers to entry for entrepreneurs and help ensure that human and financial resources are spent on developing goods, services and skills, rather than on red tape.